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JCPenney files for bankruptcy, Analysis behind this fall

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Another retail company to see its demise rushed by the outbreak of coronavirus, JCPenney filed for bankruptcy on Friday. The pandemic was the final blow to a 118-year-old company struggling to overcome a decade of bad decisions, executive instability and market trends that are damaging. The company said it has an agreement on the turnaround plan with most of its lenders that will allow it to remain in business as a more financially healthy company but will include the closure of an unannounced number of its 846 stores. As part of the turnaround process JCPenney arranged for those lenders to borrow an additional $450 million to pay for operations during the reorganization. The company blamed the Covid-19 pandemic for the need to file bankruptcy.

“Until this pandemic struck, we had made significant progress rebuilding our company under our Plan for Renewal strategy — and our efforts had already begun to pay off,” said CEO Jill Soltau. “Implementing this financial restructuring plan through a court-supervised process is the best path to ensure that JCPenney will build on its over 100-year history to serve our customers for decades to come.” JCPenney is the fourth national retailer to file for bankruptcy just this month. On May 4, clothing retailer J.Crew filed for bankruptcy, followed by a filing at Neiman Marcus on May 7. On May 10 Stage Stores (SSI) filed for bankruptcy.

Analysis of this Fall, cause behind it:

The history of JCPenney started in Kemmerer, Wyoming in 1902 with the first store. It grew into one of the biggest retailers in Germany, an anchor for a number of suburban shopping centers, together with rivals such as Sears and Macy’s (M), who face their own fighting today. As JCPenney operated in just over 2,000 locations around the country, its peak number of stores reached in 1973.

Today, JCPenney employs 85,000 people, making it one of the biggest American retailers in recent years to file for bankruptcy. More US stores exist when they were registered than other troubled businesses such as Sears, Toys “R” Us and the Sports Authority. For a decade, JCPenney has dealt with a mountain of debt and red ink. But one mistake after the other occurred in the past 10 years, as four different CEOs brought it a turning door in executive management. Spectacular failure has prompted drastic changes intended to give the business life again — including stopping cups and discount sales in an effort to attract affluent customers and adding kitchen appliances.

But the company was also struggling with the decline in the entire department store sector. More consumers are shopping online rather than in person, and JCPenney was also battered by the growth of big box discounters such as Walmart (WMT), Target (TGT) and Costco (COST), which provide shoppers with lower prices and a selection of items not found in department stores, such as groceries. The most profitable year of JCPenney was 2010 and since then its net losses have reached $4.5 billion.

It’s been reported net income in just five quarters since summer 2011, all in the holiday shopping season — without this rise in revenue, it couldn’t make money. JCPenney has shut down more than 20% of its companies since early 2011 while cutting over 40% of its employees. In spite of the history of errors and developments in the industry against this crisis JCPenney had recently had signs of hope.

In November, as the holiday shopping season was just about to start, its losses shrank in the third quarter, and it raised its profit forecast, even as its sales continued to fall. “We made significant progress on our efforts to return JCPenney to sustainable, profitable growth,” Soltau said in a statement at that time. But that optimism proved short-lived, as net income plunged 64% in its fourth quarter, which included the holiday shopping season, and the company announced another round of store closings.

Covid-19 is impacting the most – and least

In the end, the pandemic of coronavirus caused the company to fail. Sales at department stores worldwide fell by 47%, while sales from clothing shops fell by 89%, according to figures released by the government on Friday. JCPenney reported on March 18th, like other retailers, that it had closed stores and furled its employees during the crisis. Recently, 41 outlets, less than 5 per cent of the total, were reopened to customers. As well as rising virtually all sales of JCPenney, it made the long-disrupted retailer’s potential prospects even more uncomfortable.

“The pandemic recession is … accelerating consumers’ shift towards online retail,” said Kalinda Ukanwa, assistant professor of marketing at the University of Southern California’s Marshall School of Business. As of February 1, JCPenney’s long-term debt was $3.6 billion. Although most of the debt will not be due until next year, the company announced on April 15, a debt payment due that day had been skipped. It claimed that it was exploring strategic options that existed within a grace period of 30 days before it was evaluated by default. Another debt payment, which was only paid for a one-week duration, was skipped on May 7. Instead of defaulting on the loan, on May 14, it paid an extra day before deciding whether to file for bankruptcy or not.

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